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HMRC internal manual

VAT Valuation Manual

Specific applications: apportionment and valuation of membership benefits: compulsory interest-free loans

When you have established that a compulsory, interest-free loan constitutes non-monetary consideration, you will then need to value it. The problem is that because there are no members who have not made loans, it is not possible to do this by drawing a comparison with members who provide an alternative monetary consideration.

You will therefore usually have to calculate the value of the compulsory interest-free loan by adding to the annual subscription (and entrance fee where appropriate) the notional annual interest which the club might have been expected to incur had it obtained the loan from a bank or similar institution. For the purposes of this calculation the London Interbank Offered Rate (LIBOR) should be used.

This principle for valuation of compulsory interest-free loans was accepted in the case of Exeter Golf and Country Club Ltd, (1981) STC 211. In order to raise additional funds, the Exeter Golf and County Club required its members to make interest-free loans to it. We assessed on the basis that the loans were non-monetary consideration that had to be valued at open market value, and determined that value by calculating the interest that would have been payable upon an equivalent loan from a bank. The Court of Appeal found in the Commissioners’ favour and upheld the assessment.

Calculating the value of making the loan. The club can be directed to perform the calculation as follows:

  1. Take the total loan capital standing to the credit of existing members at the first day of the month in which the subscriptions were due (or first day of the club’s financial year if more convenient).
  2. Apply the base-lending rate in force at that date to give the notional interest.
  3. Multiply the amount above by the VAT fraction. This will give the additional output VAT due upon the non-monetary consideration that the members have provided.

A club may opt to perform the calculation individually for each member, but the bulk calculation will be simpler and less of a burden to perform. Interest rate fluctuations and the joining or leaving of members may be expected to balance out over the years in which case there is unlikely to be any significant loss of tax.